Saturday, February 25, 2017

The U.S. Court of Appeals for the Ninth Circuit recently held that a lower court abused its discretion in approving a class settlement for claims of violations of the federal Fair Debt Collection Practices Act (FDCPA) in which the named plaintiffs and class counsel would receive monetary compensation, but the remaining four million class members would receive only injunctive relief.

Rejecting the arguments of a consumer advocacy group that filed an amicus brief, the Ninth Circuit also held that only the consent of the named plaintiffs and defendant – and not also the absent class members -- was required for the magistrate judge to exercise jurisdiction.

The plaintiffs sued a debt collector under the FDCPA, alleging that the debt collector violated §§ 1692d(6) and 1692e(11) of the FDCPA by leaving voicemail messages in which the callers failed to disclose (1) that they worked for the debt collector, (2) that their employer was a debt collector, or (3) that the purpose of the call was to collect a debt. The plaintiffs brought the action on behalf of four million people who received a voicemail message from the debt collector which failed to disclose this information.

As you may recall, in an individual FDCPA action, a plaintiff may recover any actual damages suffered plus statutory damages up to $1,000, as well as attorney's fees and costs. § 1692k(a)(1), (a)(2)(A). In a class action, the named plaintiffs may recover actual damages plus statutory damages up to $1,000, but the damages award for the rest of the class is capped at $500,000 or 1% of the defendant's net worth, whichever is less. § 1692k(a)(2)(B).

The named plaintiff and debt collector consented to have all matters adjudicated by a magistrate judge in the trail court. The parties eventually agreed to a settlement whereby the plaintiffs would seek certification of a nationwide, settlement-only class under Federal Rule of Civil Procedure 23(b)(2), which allows for class-wide injunctive or declaratory relief.

The proposed class consisted of everyone who between 2008 and 2011 received a voicemail message from the debt collector that failed to identify the debt collector as the caller, disclose that the call was from a debt collector, or state that the purpose of the call was to collect a debt. Because the class would be certified under Rule 23(b)(2), the parties agreed that no notice of any kind would be sent to the four million class members and that no one would be permitted to opt out of the class.

The debt collector agreed to pay the three named plaintiffs $1,000 each, the maximum they could hope to recover under the FDCPA as none of them had suffered any actual damages. Because the debt collector's net worth was $3.5 million, under § 1692k(a)(B), the other four million class members could collectively recover no more than $35,000. Given the impossibility of distributing less than a penny to each member of the class, the debt collector agreed to make a cy pres award to a local charity and to pay class counsel a negotiated sum for attorney fees.

The four million unnamed class members received no monetary compensation under the settlement, but they were the beneficiaries of a stipulated injunction that required the debt collector to continue using a new voicemail message it had already voluntarily adopted. In return for that benefit, the unnamed class members forfeited the right to seek damages from the debt collector as part of a class action, but retained the right to pursue damages claims against the debt collector on an individual basis.

As required by the federal Class Action Fairness Act, the debt collector sent notice of the proposed settlement to the appropriate state and federal officials, none of whom objected to the settlement. See 28 U.S.C. § 1715(b).

The four million class members did not receive individual notice of the proposed settlement, but one class member filed an objection. She was the named plaintiff in a separate class action against the same debt collector pending in Florida, which alleged essentially the same FDCPA violations, except that she sought certification of a much smaller class limited to Florida residents who owed money to a particular creditor on whose behalf the debt collector was attempting to collect.

After the parties agreed to the settlement in this case, the debt collector asked the trial court in Florida to stay all further proceedings in the Florida class member's lawsuit on the ground that, if approved, the settlement in the case pending in the Ninth Circuit would bar the Florida case from proceeding as a class action. The trial court in Florida agreed to stay the class member's action pending final approval of the settlement in the case pending in the Ninth Circuit.

In her objection to the settlement, the Florida class member argued that the settlement in the case pending in the Ninth Circuit was unfair and unreasonable because class members would be barred from pursuing damages claims as part of a class action but would receive nothing of value in return.

After a fairness hearing, the trial court in the case pending in the Ninth Circuit certified the proposed class under Rule 23(b)(2); approved the settlement as fair, reasonable, and adequate under Rule 23(e)(2); and entered judgment accordingly.

Having objected to the settlement in the trial court in the case pending in the Ninth Circuit, the Florida class member then appealed.

Before reaching the merits, the Ninth Circuit first addressed the question of whether it had jurisdiction to decide the appeal. The Court's jurisdiction would be triggered only if the magistrate judge hearing the case by consent of the named plaintiffs and debt collector had the authority to enter final judgment under 28 U.S.C. § 636(c). The question was whether the statute required not just the consent of the named plaintiffs, but also the consent of the absent four million class members.

Section 636(c) authorizes magistrate judges, "upon the consent of the parties," to "conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves." 28 U.S.C. § 636(c)(1). When a magistrate judge is authorized to enter final judgment, "an aggrieved party may appeal directly to the appropriate United States court of appeals from the judgment of the magistrate judge in the same manner as an appeal from any other judgment of a district court." § 636(c)(3).

The Ninth Circuit noted that the Supreme Court of the United States has observed that absent class members may be treated as parties "for some purposes and not for others." Devlin, 536 U.S. at 10, 122 S. Ct. 2005. In addition, the Ninth Circuit concluded that in § 636(c)(2), which specifies the procedures for obtaining party consent under (c)(1), the phrase "the parties" is used multiple times in a way that cannot sensibly be read to include absent class members.

For example, the Court noted, section 636(c)(2)'s reference to the consent of "the parties" could encompass both the named plaintiffs and the absent class members, but in virtually all class actions, it would be impossible for the clerk of court to issue this notice to absent class members at the time the action is filed. Accordingly, viewing § 636(c) as a whole, the Ninth Circuit concluded that that Congress did not intend absent class members to be treated as parties in this context.

Additionally, the Ninth Circuit explained that the named plaintiffs in a properly certified class action are charged with conducting the litigation on behalf of the class they represent, and by definition class actions involve too many plaintiffs to allow each to participate personally. See Fed. R. Civ. P. 23(a)(1).

The Ninth Circuit concluded that Congress authorized magistrate judges to enter judgment in a class action so long as the named parties to the action have consented, and here the named plaintiffs and debt collector had done so. Thus, the class member's appeal from the judgment entered by the magistrate judge was properly before the Ninth Circuit "in the same manner as an appeal from any other judgment of a district court." 28 U.S.C. § 636(c)(3).

The only remaining issue was whether § 636(c) is constitutionally valid. The National Association of Consumer Advocates, appearing as a friend of the court, argued that the statute is unconstitutional as applied to class actions, because § 636(c) violates Article III of the Constitution by permitting magistrate judges to exercise jurisdiction over class actions without obtaining the consent of each absent class member.

Accordingly, the question before the Ninth Circuit was whether Article III categorically prohibits named plaintiffs from waiving, on behalf of the class members they represent, the right to proceed before an Article III judge. The Court noted that a categorical prohibition of that sort might be warranted if the interests of named plaintiffs and the absent class members frequently diverged with respect to exercise of the right at issue.

However, the Court held that the opposite is true of the right to have a case heard by an Article III judge, because to serve as class representatives, the named plaintiffs must have claims that are typical of the claims held by the class, and in conducting the litigation the named plaintiffs must fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a)(3)–(4).

When those requirements are met, the interests of the named plaintiffs and absent class members will almost always be aligned when it comes to deciding whether to consent to a magistrate judge's jurisdiction. Barring unusual circumstances, the named plaintiffs will have as strong an interest as the absent class members in having their claims adjudicated by an independent and impartial decision maker. The Ninth Circuit concluded therefore that the named plaintiffs in a putative class action could be expected to protect the absent class members' interests in the exercise of the right conferred by Article III.

There are constitutional limits, of course, on the named plaintiffs' authority to waive the rights of their fellow class members, but the Court noted that those limits were imposed by the Due Process Clause, not by Article III.

Most fundamentally, as mandated by due process (and enforced through Federal Rule of Civil Procedure 23), the named plaintiffs' interests must in fact be aligned with those of the class, and the named plaintiffs must adequately represent the interests of the class throughout the litigation. Taylor v. Sturgell, 553 U.S. 880, 900–01, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008); Hansberry v. Lee, 311 U.S. 32, 41–43, 61 S.Ct. 115, 85 L.Ed. 22 (1940). In some instances, absent class members must also receive notice of the action and an opportunity to opt out. Taylor, 553 U.S. at 900, 128 S.Ct. 2161; Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811–12, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985).

The absent class members in this case were not afforded notice and an opportunity to opt out, but the Court did not decide whether the Due Process Clause required those protections before the debtors could waive, on behalf of the class, the right to an Article III adjudicator, because any violation of the absent class members' due process rights would affect only the preclusive reach of the resulting class judgment in subsequent litigation. See, e.g., Hecht v. United Collection Bureau, Inc., 691 F.3d 218, 224–26 (2d Cir. 2012) (lack of notice); Crawford v. Honig, 37 F.3d 485, 488 (9th Cir. 1994) (inadequate representation).

The Ninth Circuit therefore concluded that the limits imposed by the Due Process Clause on the enforcement of class judgments do not curtail a magistrate judge's authority under § 636(c) to enter judgment that at the very least would bind the named plaintiffs who consented to the magistrate judge's jurisdiction. Thus, the Court noted, any due process violation that might have occurred here would not deprive the Court of jurisdiction to decide this appeal, given that its jurisdiction was keyed to the magistrate judge's authority to enter final judgment.

Moreover, the Court reasoned, due process issues involving the extent to which the judgment might bind absent class members in future litigation would arise only if the Court were to uphold the magistrate judge's order approving the settlement. Because the Court ultimately concluded that the magistrate judge abused her discretion in entering that order, the Ninth Circuit was not faced with such due process issues here.

Under Federal Rule of Civil Procedure 23(e)(2), a district court may approve a class action settlement only after finding that the settlement is "fair, reasonable, and adequate."

When, as here, a class settlement was negotiated prior to formal class certification, there is an increased risk that the named plaintiffs and class counsel will breach the fiduciary obligations they owe to the absent class members. As a result, "such agreements must withstand an even higher level of scrutiny for evidence of collusion or other conflicts of interest than is ordinarily required under Rule 23(e) before securing the court's approval as fair." In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935, 946 (9th Cir. 2011).

The Ninth Circuit ultimately held that the trial court abused its discretion by approving the settlement in this case because in its view there was no evidence that the relief afforded by the settlement had any value to the absent class members, even though they had to relinquish their right to seek damages in any other class action.

The Court concluded that the settlement's injunctive relief was worthless to most members of the class because it merely dictated the disclosures the debt collector must make in future voicemail messages for a period of two years. Although that relief could potentially have benefited class members who were likely to be contacted by the debt collector during the two-year window, the Court noted that the settlement class was not defined to include those who were likely to be contacted by the debt collector in the future. Instead, the Court noted, the settlement class was defined to include those who had suffered a past wrong.

The named plaintiffs and debt collector bore the burden of demonstrating that class members would benefit from the settlement's injunctive relief, which required them to show that class members were likely to face future collection efforts by the debt collector. See In re Dry Max Pampers Litigation, 724 F.3d 713, 719 (6th Cir. 2013). The Ninth Circuit held that they fell short of carrying that burden, because they made no showing that members of the class continued to receive calls from agency as part of ongoing efforts to collect debts that were by then two to five years old, and did not show that class members were likely to become targets of the agency's future collection efforts.

In addition, the Court noted that even for class members who might become targets of collection efforts by the agency in the future, the settlement's injunctive relief was of no real value because the injunction did not obligate the debt collector to do anything it was not already doing, as the debt collector had already adopted and was already using the new voicemail message.

The Ninth Circuit was also troubled by the escape clause in the settlement that allowed the debt collector to seek dissolution of the injunction "at any time if there is a change in the law." Thus, the Court noted that if the litigation risk were reduced by a new court decision or legislative enactment — the only scenario in which the debt collector might be tempted to resume its prior conduct — the debt collector could seek to dissolve the injunction.

Moreover, the Ninth Circuit also held that the named plaintiffs and debt collector presented no evidence that the absent class members would derive any benefit from the settlement's cy pres award. The Ninth Circuit held that the cy pres award was likely improper under its precedents, which require that cy pres awards be tethered to the objectives of the underlying statutes or the interests of the class members. See Nachshin v. AOL, LLC, 663 F.3d 1034, 1039 (9th Cir. 2011).

Here, the award consisted of a $35,000 donation to a San Diego veterans' organization. The San Diego location of the chosen charity had no geographic nexus to the class, which included four million individuals scattered throughout the United States. Nor was there any evidence that the settlement class was disproportionately composed of veterans. And there was no showing that the work performed by the designated charity would protect consumers from unfair debt collection practices, the objective of the FDCPA.

Thus, even putting aside the relatively small size of the cy pres award, the Ninth Circuit could not say that this aspect of the settlement provided any material benefit to the class members.

Because the settlement in the Court's view gave the absent class members nothing of value, the Ninth Circuit concluded that the class members could not fairly or reasonably be required to give up anything in return. However, the settlement required absent class members to relinquish their right to pursue damages claims against the debt collector as part of a class action.

The parties disputed whether that right had any real value to the absent class members, given the FDCPA's cap on class action damages.

The debt collector asserted that, with total damages capped at $35,000, none of the absent class members had any hope of obtaining meaningful monetary relief as part of another class action because it would be impossible to define a class small enough to afford individual recoveries of more than a trivial amount.

The Florida class member asserted, however, that the proposed class in her pending Florida action might contain as few as several hundred members, each of whom could recover meaningful relief of roughly $100.

The Ninth Circuit did not resolve the parties' dispute on this point, because it was enough to conclude that the waiver of the right to seek damages in future class actions had some value, but very few class members would bother to file their own individual actions to recover minimal (or non-existent) actual damages and statutory damages capped at $1,000.

The fact that class members were required to give up anything at all in exchange for what the Ninth Circuit saw as worthless injunctive relief precluded the approval of the settlement as fair, reasonable, and adequate under Rule 23(e)(2).

The class member also challenged the reasonableness of the settlement on other grounds, such as the disparity between what the named plaintiffs would receive and what the rest of the class members would receive, and contended in addition that the class could not be certified under Rule 23(b)(2). In light of the Court's disposition, however, it did not address these remaining contentions.

In sum, the Ninth Circuit reversed the lower court's approval of the class settlement and remanded it for further proceedings.

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